UK M&A reaches new highs despite headwinds

Favorable valuations are fueling opportunistic purchases by overseas bidders

Spiraling COVID rates, supply chain issues and food and fuel shortages have all hit the headlines in the months since the end of the Brexit transition period, but have certainly not hit the burgeoning UK M&A market.

Deal activity has remained resolutely strong throughout 2021, with a total of US$308.5 billion-worth of deals announced during the first three quarters of the year already overtaking 2020’s annual total.

The third quarter generated a deal value of US$130.2 billion—more than four times Q3 2020’s US$31.1 billion and more than double the total value for the previous quarter.

The first two quarters of the year delivered a record number of deals, with Q1’s 639 deals reaching an all-time high. While Q3 witnessed a slight normalization in activity, a total of 371 recorded deals still posted an increase of 96 deals year-on-year.

Among the largest 2021 M&A deals in the UK so far was the August-announced takeover of Avast plc, the FTSE 100 global leader in digital security and privacy, by NortonLifeLock Inc.  The merger implies an enterprise value for Avast of between approximately US$9.2 billion and US$8.6 billion, depending on Avast shareholders' elections, and will create a new, industry-leading consumer cyber safety business.

Overseas buyers flock to the UK

Interest from overseas buyers has fueled UK dealmaking activity throughout 2021. A total of US$247 billion in deals announced during the first three quarters accounted for 80% of overall UK deal value—already overtaking 2020’s annual total of US$212.2 billion.

US buyers were the major driving force behind this activity, bidding for eight of the top ten Q3 deals. The largest such deal was US buyout group Clayton, Dubilier & Rice’s US$14 billion takeover of UK supermarket chain WM Morrison, which followed a bidding war with Softbank-backed Fortress Group. WM Morrison is the second major UK supermarket chain to be taken private this year, following the sale of ASDA to a consortium of TDR Capital and the Blackburn-based Issa brothers in February.

Favorable valuations are a major reason behind this spurt of activity. According to Bloomberg, the valuation gap between the UK and other major financial markets has increased, with the UK stock market now trading at a 50% discount relative to the US compared with about 11% five years ago. This helps to explain the influx of US buyers looking to snap up high-quality UK assets at a discounted price.

PE firms hunt for bargains

Attractive valuations have prompted a wave of interest from private equity firms—particularly within the US—looking to secure opportunistic purchases. A record level of dry powder accumulated during the COVID crisis is acting as a further incentive to get deals over the line.

As a result of a flurry of big-ticket deals, total UK buyout value of US$85.4 billion announced between Q1-Q3 has already overtaken 2020’s annual total. Total volume was even better by historic standards—the 412 buyouts which took place in the first three quarters is already more than any annual total on Mergermarket record (since 2006).

The second-largest PE buyout of the quarter, after the Morrison’s deal, also involved Clayton, Dubilier & Rice (CDR). The US$2.6 billion transaction saw CDR offload a 13% stake in vehicle glass repair firm Belron International to a consortium comprising PE firms Hellman & Friedman and BlackRock, along with Singaporean sovereign wealth fund GIC. After the transaction is completed, CDR will maintain a 24% stake in the company.

Other significant PE deals of the quarter include the US$1.5 billion acquisition of software company Blue Prism Group by Vista Equity Partners, the acquisition of digital services agency Valtech by BC Partners for US$1.4 billion and the US$1.4 billion acquisition of veterinary clinics network Medivet by CVC Capital Partners.

An active market

Despite headwinds including supply chain issues caused by Brexit and the COVID-19 pandemic, the UK’s macroeconomic outlook is brightening and valuations for assets remain relatively low compared to overseas markets. This has created an ideal environment for dealmaking among overseas firms—both corporate and PE—as they look to snap up high quality assets at competitive prices.

Although the UK has historically been welcoming to overseas buyers, some transactions are raising concerns among policymakers. Another of the largest transactions of Q3 was US-based aerospace firm Parker Hannifin’s proposed US$9.9 billion takeover offer for UK aerospace and defense group Meggitt. Parker Hannifin had fought off competition from US rival TransDigm in order to secure the deal, which has attracted interest from the UK government due to Parker Hannifin’s status as critical suppliers to the armed forces.

Financing remains affordable for many investors, while the ongoing COVID vaccine rollout is opening up the UK economy and improving investor confidence. These favorable dealmaking conditions will ensure that the UK M&A market remains a hotbed of dealmaking activity during the final quarter of the year, and into 2022. And while a few high-profile cases in the aerospace and defense sector have attracted government intervention, the market is still generally very much open to overseas buyers.

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